Unusual Billionaires: Decoding secret of Asian Paints' success

Saurabh Mukherjea's book, Unusual Billionaires describes successful businesses via a common theme. Using John Kay's famous framework of innovation, reputation, architecture & strategic assets, Mukherjea explains the success stories of seven Indian companies.

To find out what lies behind the seven decades of continued excellence at Asian Paints, watch Jalaj Dani's (President - HR, Supply Chain & Chemicals, Asian Paints) interview with Latha Venkatesh on CNBC-TV18.Below is the verbatim transcript of Saurabh Mukherjea and Jalaj Dani’s interview to Latha Venkatesh on CNBC-TV18.Q: The first thing that impresses when one reads the Asian Paints story in Saurabh’s book is that actually there are four families that had gotten together to invest in Asian Paints. Usually, there can be trouble even if one family invests. Over a period of seven decades, no discord. How did the Choksis, the Danis, the Vakils and the other Choksis manage without any problems for seven decades?Dani: One thing I have always seen in the organisation and I grew up hearing it is if it is good for Asian Paints, it is good for the families. So, the interest of the company has always been put ahead of everything else. And in a very disciplined manner keeping the egos aside, decade after decade, I have seen the first generation, the second generation and now, we are the third generation. And I must say all the stakeholders, the people who work in the company, all the employees, all the senior management members, suppliers, customers, everybody practices this philosophy.Q: Same question to you. As you said in your book, others pass muster for 10-20 years, Asian Paints has passed this very difficult test of consistency for 70 years. What stands out for you as the unique attribute?Mukherjea: I will take your 70 years point a little further. There is a chart on the book, page 29, exhibit 9. For me that is the chart of the book because what it shows is not just the revenue growth, as you very correctly pointed to, but also improving return on capital employed (ROCE) for nearly four decades and improving profit margins for nearly three decades. I doubt there is any company. I know there is no other company in India that has pulled it off. I doubt, if I even did a global search, I would find any other company like this.So, in a way, the book itself, as I say in Chapter 1, a big reason for writing the book was actually trying to understand how does this company pull it off. As analysts, we were genuinely curious because our armchair tendency tends to be to say most companies ROCE will revert to cost of capital over a period over a period of time. Here is a company that was telling us that we were wrong over multiple decades. And hence we needed to understand what makes the company special. And as I highlight in the book, the ability of the three families to work cohesively, they emphasise the family’s focus on the company itself. What Jalaj just said, most promoters that I meet, what is good for the promoter is then supposed to be good for the company. Here it is the other way round and that is a big part of the secret. But also, what they have done very well is stay focused on one industry, stay focused on paints. Even as India changes, their focus on paints has been broadly unwavering and unwearing. There are a few other lines that they have begun, but the core focus of the business has been paints and as a result, they have pulled away from the rest of the paints industry in way that I do not think I have seen in any other industry in India. The market leader, nearly 50 percent market share, multi-decadal dominance, it is very rare to see in any country in any industry.Q: The obvious question that many people would have asked you is how do you manage the relation between promoter and professional. One is used to expecting logically that a professional run company would be able to show consistency. But, how did you manage that ideal balance between promoter and professional management interest.Dani: Again, I must say that if I look back from the 1960’s, we have been going to Indian Institute of Management (IIM), the premium management institutes over all these decades. So, you go out there and hire the best talent. You empower them, you give them responsibility at very young stage in their career and they have, through that, demonstrated excellent performance, not only in the area of sales or marketing or technology or supply chain or IT, HR or financial controls. All across, this has been the culture of the organisation that if we get good people, we treat each other well as an organisation. Over a period of time, that culture gets built and that is what we have seen decade after decade. People have come, they have joined the organisation, they have stayed with the company over all these years and contributed to the growth of the company. And it has been an unbelievable story because of that. Q: If I were to ask you what is the secret of this 70 year success, what would you name?Dani: One thing that clearly stands out is we are in a sector that continues to grow year after year. Even if you look at the data of the last 25 years which is the 25 years of liberalisation, here is one industry that has grown near double digits year after year for the last 25 years. So, it is an industry that understands that the per capita consumption of the product is low in this country, pushes itself very hard to increase consumption over a period of time, keeps focus on what is value for the customer, keeps on innovating, keeps on developing and bringing newer technologies and products and value proposition for the customers. Q: It will be obvious to everybody that this industry in India is likely to grow at this pace. Why is it that Asian Paints succeeded? What is the success mantra for 70 continuous years? And, the ability to stay as the market leader for this entire period, what is that secret mantra?Dani: As I was saying, the sector itself has grown and within that, from mid-1960’s when we became market leaders, we have seen ourselves adding more topline year after year and gaining more share. We also find value in staying focused to one line of business. So, it is broadly paints, but within that whether it is decorative paints or industrial paints. And in the last few years, we are now looking at a much larger canvas as far as home improvement is concerned, as far as decorative paints across emerging markets are concerned, alliances in these areas in the last few years is what we are seeing. So, a very disciplined approach in a category that is growing. Because you are disciplined committed to a category, you continuously invest. So, if you look at computerisation, again this is something which was a word pretty much nobody had heard of in the 1960’s and 1970’s, but the organisation invested in that. Backward integration, self sufficient as far as technology is concerned. Connecting with the consumer, value proposition in terms of building brands, offering services. Organisation has done many things over a period of time, but because we have stuck to the knitting and margins have been good, ROCE has been good, we have gone back and again invested in good manufacturing practices, a relationship with all stakeholders over a period of time. So, very committed, very focused, very conservative also.Q: Similar question to you. What would you think is Asian Paints’ secret mantra? And if you can even give a hierarchy, is it people management, is it professionalism, is it technology, something else, give me a pecking order. Mukherjea: The way I would look at it is there are obviously many specifics that we know. In fact the specifics are so many I could have written at least thrice the length of the Capter. But if I had to step back and say what are the behaviours that this company’s management and its promoters have shown which have led to such an outstanding result. I would point to three things. One is as Jalaj himself pointed out, focus that we want to stay unwaveringly focused in this industry because we see the growth here and we do not see any reason to move away to other sectors. That is very rare in India. As I say in the book, 99 percent of Indian promoters struggle to stay focused on the same thing for more than 4-5 years. The second thing is as Jalaj is pointing to, it is not just enough to stay focused, you also have to have that on that desire to say how do I improve myself. And as Rama Bijapurkar, the independent expert and one of the finest strategy analysts in India, she says in the book, for as long as she has been a management professional, Asian Paints has been obsessing about talent and technology well before anybody else did it. In these times, we are used to hearing about the war for talent these days. Asian Paints has been fighting and winning the way for talent from the 1960’s. So, that desire to say how do I get better, how do I get better technology, Asian Paints were the first to bring Asian Paints into India. Well before the government or even IIT Bombay brought in mainframes, Asian Paints brought mainframes into the play in 1971.So, that desire to say how do I get better in whatever I am doing and do it over multiple decades gives you such a powerful franchise that you get to the result I highlight in the book that when I speak to the paints industry professionals, they say if you or I try to build a company that could compete with Asian Paints, it is close to impossible. That is power of focus and a constant commitment to improve your people, you processes, you technology.Q: How do you guys approach acquisitions or how do you approach foreign markets? Were these temptations to avoid or are these temptations to succumb?Dani: I must say that the first international foray that we made in the mid-1970’s was more out of intellectual curiosity for the top management then on whether we can actually succeed outside India. It was nothing more than that. And it was a small venture and we were still a private company. But how much can we afford to invest and what we can do with our brand name and with our technology, with our customer focus. So, that is how the journey started. We have also seen good organic growth in our business. But over a period of time, we realised that if we have to get distribution, we have to get brand, if we have to get talent, as we go to more and more emerging markets, it makes more sense to do acquisitions than only do organic growth. So, we started doing acquisitions only in 1990’s. We did an acquisition in India as far as the powder coating business concerned, then we did one in Sri Lanka and then we did quite a few in 2002 and then we have added some more in the last few years. So, our approach always has been that again is it something that is consistent with our value in terms of how we want to operate as an organisation, disclosures, compliance, proposition to the consumer, leveraging our supply chain, our back end as far as India is concerned, whether it is paint technology, whether it is information technology.And also, can our people, as in not people who are necessarily from India, but in terms of the cultural fit that we have, the values that we cherish on which we have built the organisation, is it consistent with that over a period of time.Q: You want to add to that, have they better managed their temptations?Mukherjea: I think one benefit of what Jalaj described was because of the way this company is run it has produced several of India's best CEOs, people who have gone elsewhere and achieved a lot. If you look around Pidilite today is run by Asian Paints alumni - Bharat Puri is doing a wonderful job there. Berger Paints is run by Asian Paints alumni. I think Sanjeev Aga of Idea was Asian Paints alumni. This company is probably one of the best warehouses of management talent in the country because of the way it sort of cultivated talent, hired bright people and cultivated them over decades. The other interesting point in what Jalaj says and I try to bring this out in chapter 8 of the book is that they haven’t got everything right, they are human as well. So, whilst they are focused, whilst they are trying to improve themselves some capital allocation calls haven’t quite worked out. However the beauty of it is in spite of some quite significant capital allocation calls not having worked out, the international foray probably did not produce the return on capital employed that was desired, the strength of the franchise and the discipline of the franchise is such that the overall return on capital employed still stays very healthy and that is a sign of a truly great company.A truly great company is not one that gets every call right, it is not possible to do that in a free market economy. A truly great company loses a few battles but still wins the war because of the strength of the franchise and the discipline in which capital is allocated to new ventures. So, if you look at the international forays they have been deemphasized in recent years and there are a few domestic acquisitions that are being done, small ones admittedly but Asian Paints is looking at the future saying we don't quite know what the future holds, let us try out a few things without hurting the core engine of the business.Q: If you have to look into the future, how do you see Asian Paints 10 years down the line? Will it still be largely a paint company? What would be the red flags and the green flags that you see?Dani: We clearly see two things happening as an organisation, we find ourselves more and more growing in the emerging markets. So, we are in the process of doing more acquisitions, integrating the existing acquisitions, also making greenfield investments. We also see ourselves becoming much stronger as far as the industrial business is concerned through alliances.More importantly as a organisation we are now on this path of from a paint company to a decor company. We see in the Indian context consumers spending a lot more as far as their homes are concerned and in that journey we see that it is not about a can of paint, it is about a painted wall, it is about what else we can do on the walls, whether it is water proofing, whether it is construction chemicals, whether it is wallpaper, whether it is more things that we can do as far as kitchens and baths are concerned. So, we are on this journey from a very well established decorative paint company to becoming a solution provider in the decor space.Q: How does Asian Paints brain thrust work, is it that the promoter families and the professionals sit together every half year and brain storm. How is this consistency produced?Dani: I would say that it is the families and the top management together. Also, I think we have had some very good advisers over a period of time including the independent directors that we have today. As far as the organic growth of the decorative business is concerned, we continue to stay dissatisfied with status quo.We definitely want to grow the business, we want to improve technology, our distribution, invest more in the brand, in the consumer connect because many things we continuously keep on doing as far as these things are concerned and for us it is important that we deliver a good bottom line, but we have always believe that we must have a good volume growth. We must gain market share year after year, that something the organisation truly believe in and continuously does that.As far as new lines businesses are concerned, there are conversations around that and I have to accept what you asked earlier is also true. You can take risk, but how much can you afford to take risk. It is not that we don’t, we are investing Rs 4,000 crore in two new manufacturing sites in the next two and a half years, which is a very, very large investment or we are investing Rs 500 crore as far as our Indonesia foray is concerned.It is not that we are holding ourselves back on some of these investments, but they are disciplined to the extent that they are in decorative business in emerging markets and if possible in services in related lines adjacencies and if possible over a period of time in home improvement.Q: So very soon you will be in the entire range of home improvement, you see yourself as a home improvement company, not as a paint company?Dani: Yes, in that light, we have what we call signature stores, this is something we started 7-8 years ago to what we call colour ideas today and now in the last few months we have launched something which we call AP homes, which allows a consumer to explore the space of home improvement, engage through Asian Paints with multiple categories and make better purchase decision and also work with a set of service providers to get it install.Q: Very soon we should be seeing you, looking at acquisitions in home improvement businesses, there I mean why would you want to start afresh, it would make more sense to acquire it?Dani: We have done two acquisitions in the last 3 years as far as home improvement space is concerned. Again, we need a certain fit in terms of the brand, in terms of manufacturing, in terms of distribution and things like that. We are busy building up that in terms of it already in kitchen and bath space, we can definitely do more as far as that is concerned and we will continue to explore if there are more things we can do, whatever kind of alliances we can put together over a period of time as far as this space is concerned, but again we are in not lot of hurry. We want to grow the business at a certain pace and also make sure that we stay profitable and continually invest, because in that it is that brand that we have built as an organisation in the home improvement space over all these years, so anything we do in the home improvement space now has to match up to that.Q: When you make an investment, you are looking at the past, so how would you extrapolate Asian Paints’ future. What would be your red and green flags?Mukherjea: I mean the future is unknown and one of the things I have tried to do in the book and I have tried to do even in my personal investment avatar is look as far back as possible. We don’t know what the future will bring at least we can look as far as back possible.On a qualitative basis what you try to do is, you try to find out are the companies that you are contemplating investing in, are they thinking about the future, alive to the possibilities and alive to the risks available and when you meet the management team, which is alive to both and is making small experiments to see what will and what won’t work, you are reasonably assured that however the future pans out, this company is making judicious investments to be in the right place at the right time.There are no guarantees in life, all you can do is back the management team, which is alive to the possibilities and risks and make judicious investments to be in the right place at the right time 10 years hence. If you ask me why are we sitting in the studio in the 75 year of Asian Paints and celebrating the success, one of the reasons is Jalaj and his colleagues have been able to do this and in fact his predecessors’ generation have been able to do this over the best part of India’s independence.Dani: You are absolutely right. We keep on talking about this in the company that you can’t drive looking at the rear view mirror or what you got here won’t get you there. So that whole thing around being paranoid about success and not taking it for granted, but continuously pushing the envelope and reinventing whatever you think is the competitive advantage today for what is tomorrow and it slightly nebulous, so we have to try a few things that are extraordinary in all kind of investments that we continue to make, that I think the only way we will be there hopefully for another 75 years.Q: So, you all do this every quarter? Is there a time period at which you say we have to focus and see where have we come from, what is the rear view mirror saying and what is the road ahead saying?Dani: As an organisation across all functional areas and at all levels in the company this happens continuously. I don't think I find one function or one part of the company at any level feeling we have now arrived and we can celebrate. Of course we must celebrate every destination that we reach but it is just in this journey that you are on and that is a culture in the organisation. So, many times we bashup ourselves also, maybe too harshly also because we always think we haven’t arrived and we are not doing as much as we should. However as we see this journey over all these years I must say that we have covered reasonable amount of distance.Mukherjea: You can see why greatness is not everybody's cup of tea because they are two very paradoxical behaviours that Asian Paints is marrying. This is the nervous energy to constantly introspect, look ahead and yet that nervous energy, that entire sort of thinking is not resulting in hasty action. You are maintaining your focus, you are calmly allocating capital and yet you are constantly looking and saying where do the pitfalls lie for us, where do the opportunities lie for us, that marriage is very hard to attain.What I see with Indian companies is either they go completely overboard with nervous energy or they go completely overboard with caution and then they get disrupted by new technologies and new entrants, that marriage is very hard to pull-off which is why there aren’t that many Asian Paints in India.